U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended: SEPTEMBER 30, 2006
Commission File Number: 0-23100
HEALTHSPORT, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2649848
(State of Incorporation) (IRS Employer ID No)
7633 EAST 63RD PLACE, SUITE 220, TULSA, OKLAHOMA 74133
(Address of principal executive office)
3930 GLADE ROAD, STE 108-200, COLLEYVILLE, TEXAS 76034
(Former address of principal executive office)
(877) 570-4776
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of September 30, 2006 was 16,380,788.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
HEALTHSPORT, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION (Unaudited)
Item 1: Condensed Consolidated Balance Sheet as of September 30, 2006 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2006 and 2005 4
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 2006 and 2005 and the period from inception
(September 9, 2004) through September 30, 2006 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2006 and 2005, and the period from
inception (September 9, 2004) through September 30, 2006 6-7
Notes to Condensed Consolidated Financial Statements 8-15
Item 2: Management's Discussion and Analysis or Plan of Operation 16-19
Item 3: Controls and Procedures 20
PART II OTHER INFORMATION 21-22
Exhibits 23-24
2
HEALTHSPORT, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Balance Sheet
September 30, 2006
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 244,343
Inventory 3,500
Inventory deposit 72,750
------------
Total current assets 320,593
Goodwill 50,000
Patent costs 1,112,611
------------
Total assets $ 1,483,204
============
Liabilities and Stockholders' Equity
Current liabilities
Convertible promissory note $ 448,600
Accounts payable and accrued expenses 38,293
------------
Total liabilities 486,893
------------
Minority interest 205,180
Commitments and contingencies
Stockholders' equity
Preferred stock: $2.75 par value; authorized 2,000,000 shares;
no shares issued and outstanding --
Common stock: $.0001 par value; authorized 500,000,000 shares;
issued 16,381,382 shares and outstanding 16,380,788 shares 1,638
Additional paid-in capital 24,370,133
Common stock warrants 1,200
Deferred compensation (164,855)
Accumulated deficit (23,416,985)
------------
Total stockholders' equity 791,131
------------
Total liabilities and stockholders' equity $ 1,483,204
============
See accompanying notes to condensed consolidated financial statements.
3
HEALTHSPORT, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
CONTINUING OPERATIONS
Administrative expense $ 176,922 $ 385,1422
Equity in joint venture loss -- 25,000
Interest income (3,669) --
Interest expense 142,638 103,016
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (315,891) (513,158)
MINORITY INTEREST 19,820 --
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (296,071) (513,158)
----------- -----------
DISCONTINUED OPERATIONS
Loss from discontinued operations -- (99,202)
Income tax benefit -- --
----------- -----------
NET LOSS FROM DISCONTINUED OPERATIONS -- (99,202)
----------- -----------
NET LOSS $ (296,071) $ (612,360)
=========== ===========
NET LOSS PER SHARE, BASIC AND DILUTED
CONTINUING OPERATIONS $ (0.25) $ (0.80)
DISCONTINUED OPERATIONS -- (0.16)
----------- -----------
TOTAL $ (0.25) $ (0.96)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 1,198,864 639,221
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
HEALTHSPORT, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2006 and 2005, and the period
from inception (September 9, 2004) through September 30, 2006
(Unaudited)
From inception
(9/9/2004)
Nine Months Ended through
September 30, September 30,
2006 2005 2006
----------- ----------- -----------
CONTINUING OPERATIONS
Administrative expense $ 392,982 $ 695,6142 $ 1,671,204
Asset impairments -- -- 311,002
Abandoned asset 1,491 -- 1,491
Equity in joint venture loss -- 75,000 134,691
Interest income (5,633) -- (5,633)
Interest expense 776,287 295,905 1,274,453
----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST (1,165,127) (1,066,519) (3,387,208)
MINORITY INTEREST 19,820 -- 19,820
----------- ----------- -----------
NET LOSS FROM CONTINUING OPERATIONS (1,145,307) (1,066,519) (3,367,388)
----------- ----------- -----------
DISCONTINUED OPERATIONS
Loss from discontinued operations -- (28,960) --
Income tax benefit -- -- --
----------- ----------- -----------
NET LOSS FROM DISCONTINUED OPERATIONS -- (28,960) --
----------- ----------- -----------
NET LOSS $(1,145,307) $(1,095,479) $(3,367,388)
=========== =========== ===========
NET LOSS PER SHARE, BASIC AND DILUTED, FROM:
CONTINUING OPERATIONS $ (1.13) $ (1.90) $ (4.80)
DISCONTINUED OPERATIONS -- (0.05) --
----------- ----------- -----------
TOTAL $ (1.13) $ (1.95) $ (4.80)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED 1,010,127 562,002 700,844
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
5
HEALTHSPORT, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005, and the period
from inception (September 9, 2004) through September 30, 2006
(Unaudited)
From inception
(9/9/2004)
Nine Months Ended through
September 30, September 30,
2006 2005 2006
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,145,307) $(1,095,479) $(3,367,388)
Loss from discontinued operations -- (28,960) --
----------- ----------- -----------
Loss from continuing operations (1,145,307) (1,066,519) (3,367,388)
Adjustment to reconcile net loss to net cash used
in operating activities:
Minority interest (19,820) -- (19,820)
Beneficial conversion feature of convertible note 358,880 -- 358,880
Amortization of deferred stock compensation 4,084 -- 4,084
Depreciation and amortization 16,605 279 16,977
Asset impairments -- -- 311,002
Equity in joint venture loss -- 75,000 134,691
Common stock issued for services 58,500 186,182 244,682
Abandoned asset 1,491 -- 1,491
Inventory (3,500) -- (3,500)
Prepaid expenses and other assets (78,457) -- (78,457)
Accounts payable 164,539 (81,816) 122,397
Due from related parties -- 22,466 370,750
Accrued expenses 437,380 400,555 969,586
----------- ----------- -----------
Net cash used in continuing operations (205,605) (463,853) (934,625)
----------- ----------- -----------
Net cash used in discontinued operations -- (63,800) (163,002)
----------- ----------- -----------
Net cash used in operations (205,605) (527,653) (1,097,627)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of computer equipment -- -- (1,863)
Investment in joint venture -- (115,500) (115,500)
----------- ----------- -----------
Net cash used in investing activities -- (115,500) (117,363)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds 448,600 570,356 1,329,381
Loan repayment -- (7,500) (7,500)
Sale of common stock -- 135,000 135,000
Cash received in acquisition of IMGI -- -- 1,200
----------- ----------- -----------
Net cash provided by financing activities 448,600 697,856 1,458,081
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 242,995 54,703 243,091
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,348 2,692 1,252
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 244,343 $ 57,395 $ 244,343
=========== =========== ===========
(Continued)
See accompanying notes to condensed consolidated financial statements.
6
HEALTHSPORT, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005, and the period
from inception (September 9, 2004) through September 30, 2006
(Unaudited)
From inception
(9/9/2004)
Nine Months Ended through
September 30, September 30,
2006 2005 2006
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ -- $ 270 $ 270
Income taxes -- -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for:
Investment in Health Strip Solutions, LLC $ 900,000 $ -- $ 900,000
Investment in World Championship Poker -- 295,544 295,544
Investment in joint venture -- 19,191 19,191
Conversion of convertible notes and accrued interest 5,006,281 569,516 5,775,797
Accounts payable 161,507 47,937 209,444
Accounts payable and Idea Management Group, Inc. 295,840 -- 295,840
Amount due related party -- -- 22,000
Issuance of common stock warrants for:
Acquisition of IMGI and Gaming -- -- 1,200
Acquisition of television programs -- -- 65,458
Cancellation of common stock warrants -- 65,458 65,458
Issuance of convertible notes for accounts payable
and accrued expenses -- 503,800 503,800
See accompanying notes to condensed consolidated financial statements.
7
HEALTHSPORT, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following notes to the condensed consolidated financial statements and
management's discussion and analysis or plan of operation contain
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements may include projections or
expectations of future financial or economic performance of the Company, and
statements of the Company's plans and objectives for future operations. Words
such as "expects", "anticipates", "approximates", "believes", "estimates",
"hopes", "intends", and "plans", and variations of such words and similar
expressions are intended to identify such forward-looking statements. No
assurance can be given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any such
forward-looking statements. Important factors that could result in such
differences, in addition to other factors noted with such forward-looking
statements, include those discussed in Exhibit 99.1 filed with the Securities
and Exchange Commission as an exhibit to the Company's Annual Report on Form
10-KSB for fiscal year 2002.
NOTE 1--BASIS OF PRESENTATION
-----------------------------
The condensed consolidated financial statements include the accounts of
Healthsport, Inc. ("Healthsport") and its wholly owned subsidiaries, World
Championship Poker, Inc. ("Poker"), Strategic Gaming Consultants, LLC ("Gaming")
and Maxx Motorsports, Inc. ("Maxx"), and its wholly owned subsidiary, Team
Racing Auto Circuit, LLC ("TRAC") and Health Strip Solutions, LLC ("Health
Strip") the 80% subsidiary of Healthsport (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. Developing the Company's film strip product containing
electrolytes represents the only active operations of the Company and the
current development stage operations.
On April 24, 2006, the Company filed a Definitive Information Statement pursuant
to Section 14C which provided that effective May 15, 2006; 1) the name of the
Company would be changed to Healthsport, Inc.; 2) the Company's issued and
outstanding shares would be reverse-split one share for each 200 shares; and 3)
the Company's Certificate of Incorporation would be restated to reflect these
amendments. These amendments were approved by the Company's Board of Directors
and in writing by 52.33% of the Company's shareholders on March 31, 2006.
Accordingly, effective May 15, 2006, the Company's name was changed to
Healthsport, Inc., the shares were reverse-split one for 200 and the Company's
Certificate of Incorporation was restated to reflect these amendments. The
Company has made the change in outstanding shares and all references to shares
retroactive for all periods presented in the financial statements.
8
On March 29, 2006, the Company entered into a Unit Purchase Agreement with the
majority of the unit holders of Health Strip, a Nevada limited liability
company, to acquire 80% of Health Strip in exchange for 500,000 shares of the
Company's $.0001 par value common stock. The seller had the right to rescind
this transaction by May 31, 2006, if the Company was unable to cause a minimum
of $4,000,000 of its outstanding liabilities to convert into the Company's
common stock by May 15, 2006, which was extended until September 30, 2006.
Effective September 30, 2006, $5,463,628 of convertible debentures, accounts
payable and accrued expenses were converted into the Company's common stock.
Health Strip holds certain proprietary technology for the formulation of a thin
film electrolyte strip which is the subject of a provisional patent filed in the
U.S. Patent and Trademark office on June 14, 2006. In addition, Health Strip has
agreed with InnoZen to manufacture and distribute the electrolyte strips through
its California based manufacturing facility. Through the use of InnoZen's
patented manufacturing process the electrolyte strips have now been produced.
Product names and packaging should be finalized by early November 2006, at which
time sales should commence.
On September 9, 2004, Healthsport acquired Idea Management Group, Inc. ("IMGI")
and subsequently acquired Gaming, both of which were non-operating development
stage enterprises within the meaning of Statement of Financial Accounting
Standards No. 7, ("SFAS No. 7") "Accounting and Reporting by Development Stage
Enterprises." The Company follows the AICPA SOP 98-5, "Reporting on the Costs of
Start-Up Activities" in accounting for its start-up activities. Accordingly, the
costs associated with the new development stage activities have a new inception
date of September 9, 2004, and all prior development stage costs associated with
the discontinued automotive racing league have been transferred to accumulated
deficit. The acquisition of Health Strip, discussed above, is a continuation of
activities originally started in the joint venture with InnoZen. Health Strip
anticipates sales will commence during the fourth quarter of 2006 and the
Company will no longer be in the development stage.
The condensed consolidated financial statements included in this report have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These condensed
consolidated financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
However, these condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report for the year ended December 31, 2005,
which is included in the Company's Form 10-KSB for the year ended December 31,
2005. The financial data for the interim periods presented may not necessarily
reflect the results to be anticipated for the complete year.
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
9
NOTE 2--GOING CONCERN
---------------------
The Company has not established any sources of revenue to fund the development
of business, projected operating expenses and commitments for the next twelve
months. Since August 26, 2003, when the Company discontinued its plans to begin
a racing league, the Company attempted to locate and negotiate with a business
entity for the merger of that target business into the Company. As discussed
below, the Company has acquired new development stage businesses commencing on
September 9, 2004. Since September 9, 2004, the Company incurred losses in the
amount of $2,222,081 through December 31, 2005 and $1,145,307 during the nine
months ended September 30, 2006. Management believes the electrolyte strip
product will be a business capable of generating revenues sufficient to fund
projected operating expenses and commitments. The Company currently plans to
borrow additional funds and also to sell its common stock in private placement
transactions to raise the additional capital required to complete its business
plan. However, there can be no assurance that the planned loans, sales of common
stock or anticipated commencement of sales will provide sufficient funding to
develop the Company's current business plan.
During the quarter ended September 30, 2006, the Company issued 15,223,500
shares of its common stock in exchange for convertible debentures, accounts
payable and accrued expenses in the amount of $5,463,628 and services in the
amount of $58,500. As a result, the Company's working capital deficit has been
reduced to $166,300 at September 30, 2006. The Company expects to convert its
remaining convertible debenture into common stock during the fourth quarter of
2006. However, there can be no assurance that this will be accomplished.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The condensed consolidated financial statements do not
include any adjustments that may result from the outcome of these uncertainties.
NOTE 3--ACQUISITIONS
--------------------
ELECTROLYTE STRIP
-----------------
On April 19, 2005, the Company entered into a joint development agreement with
InnoZen to jointly develop a film strip product containing electrolytes to
replenish the body while under physical stress (the "electrolyte strip").
InnoZen had experience in the formulation, development, manufacturing and sale
of edible thin strips containing drug active ingredients. The Company has the
ability to assist in obtaining endorsements for the electrolyte strips by
well-known athletes and coaches. The Company contributed $115,500 in cash and
1,250 shares of its common stock, valued at $19,191 using the Black-Scholes
valuation model, for its 50% interest in the joint venture.
As of September 30, 2005, the joint venture had completed a product formulation
of an acceptable thin film prototype containing electrolytes and had completed
laboratory stability testing for the oral dosage product. The joint venture
produced initial electrolyte strips capable of holding a deliverable load of
electrolytes equal to approximately one fluid ounce of most recognized sports
drinks. The electrolyte strips were produced for flavor testing with initial
flavors to be lemon-lime and orange. All joint venture funds were expended by
December 31, 2005.
10
On March 29, 2006, the Company entered into a Unit Purchase Agreement with the
majority of the unit holders of Health Strip, a Nevada limited liability
company, to acquire 80% of Health Strip in exchange for 500,000 shares of the
Company's $.0001 par value common stock. Health Strip holds certain proprietary
technology for the formulation of a thin film electrolyte strip which is the
subject of a provisional patent filed in the U.S. Patent and Trademark office on
June 14, 2006. In addition, Health Strip has agreed with InnoZen to manufacture
and distribute the electrolyte strips through its California based manufacturing
facility. Through the use of InnoZen's patented manufacturing process the
electrolyte strips have now been produced. Product names and packaging should be
finalized by early November 2006, at which time sales should commence.
At the time it was acquired, Health Strip did not have any tangible assets or
liabilities, but it did have certain proprietary technology for the formulation
of a thin film electrolyte strip and the rights to file for a patent of this
process. Accordingly, Health Strip recorded $1,125,000 as an intangible asset
for patent technology rights, 80% of which is equal to the value of the
Company's stock issued on the date of the transaction. As stated above, the
Company has filed a provisional patent in the US Patent & Trademark office and
has twelve months to file a final application. The Company commenced
amortization of the total patent costs in July 2006 over seventeen years, the
life of the expected patent. The Company will periodically evaluate the
unamortized balance of the patent and technology costs and record an impairment
loss if warranted.
POKER
-----
On June 28, 2005, the Company issued 19,250 shares of its common stock, which
were valued at $295,544 using the Black-Scholes valuation model, to acquire
Poker, whose principal asset is the rights to a proprietary fantasy football
format, with the working title, Vegas Roll'em(TM) Fantasy Football ("Vegas
Roll'em"). The Company recorded the investment of $295,544 as goodwill on the
books of Poker.
In January 2005, the Rules of Competition for Vegas Roll'em received a copyright
from the United States Copyright Office. This format allows live filming of the
high stakes action as it unfolds. Each player will have a roll of the dice to
determine which of his players will make up his team. According to the Fantasy
Sports Trade Association, fantasy football was played by nearly fifteen million
participants last year. This internet-based phenomenon has created a four
billion dollar industry.
While the Company may still pursue this project , its principal focus is on the
agreement with Health Strip. Accordingly, at December 31, 2005, the Company
elected to impair its investment in the goodwill associated with Poker to the
$50,000 amount it had determined to be the fair value of the investment.
TELEVISION PROGRAMS
-------------------
On October 15, 2004, the Company acquired two television programs entitled
"America's Top Drivers" and "Women's Racing League" in exchange for warrants to
acquire 8,750 shares of the Company's common stock at an exercise price of
$20.00 per share. The transaction was valued at $65,458 using the Black-Scholes
option pricing model. As of December 31, 2005, the Company was unable to locate
a venue to produce the shows. Accordingly, the Company fully impaired its
investment of $65,458 at December 31, 2005.
11
On September 28, 2005, the Company completed the modification of its television
program purchase agreement in order to recognize the compensation element of the
agreement. The warrants to acquire 8,750 shares of the Company's common stock at
$20.00 per share were cancelled and the Company issued 18,000 shares of its
common stock to the seller of the programs. The 18,000 shares of common stock
were valued at $251,640, utilizing the Black-Scholes valuation model. The
$251,640 was reduced by the original calculated value of the warrants, which
were cancelled, of $65,458 and a net consulting fee expense of $186,182 was
recorded.
NOTE 4--DISCONTINUED OPERATIONS
-------------------------------
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. Accordingly, on August 26,
2003, the Board of Directors of the Company unanimously approved a plan to
immediately discontinue its racing operation.
In March 2005, the Company and all other parties to the litigation, which
initiated in February 2004, agreed to dismiss with prejudice all claims and
counterclaims. As a result, the Company was relieved of previously recorded
liabilities in the amount of $281,181. The Company recorded $210,939 in
additional legal fees, which resulted in a net gain from discontinued operations
of $70,242 during the three months ended March 31, 2005. The Company recorded
additional legal fees of $99,202 during the September 2005 quarter which
resulted in a loss from discontinued operations of $99,202 and $28,960 for the
three and nine months ended September 30, 2005, respectively.
NOTE 5--STOCK OPTION PLANS
--------------------------
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment"
(SFAS 123(R)). Among other things, SFAS 123(R) requires expensing the fair value
of stock options, previously optional accounting. For transition, upon adoption
on January 1, 2006, SFAS 123(R) would require expensing any unvested options and
will also require the Company to change the classification of certain tax
benefits from option deductions to financing rather than operating cash flows.
Prior to January 1, 2006, the Company accounted for options granted under its
employee compensation plan using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations including Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." Under APB 25, compensation expense was recognized for the
difference between the market price of the Company's common stock on the date of
grant and the exercise price. As permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), stock-based compensation was included as a pro forma disclosure in the
notes to the consolidated financial statements.
12
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R
(Revised 2004), "Share-Based Payment" ("SFAS 123R") using the modified
prospective transition method for all stock options issued. SFAS 123R requires
measurement of compensation cost for all options granted based on fair value on
the date of grant and recognition of compensation over the service period for
those options expected to vest. The Company had no unvested options outstanding
prior to July 1, 2006. Stock-based compensation expense recorded for the quarter
ended September 30, 2006, includes the estimated expense for stock options
granted on or subsequent to July 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R. The Company recorded
the cost of stock options by increasing additional paid-in capital and
increasing deferred compensation. The deferred compensation is being amortized
over the period which the awards, are expected to be exercised. As prescribed
under the modified prospective and prospective transition methods, results for
the prior period have not been restated.
The Company recognizes compensation expense on a straight-line basis over the
requisite service period for each stock option grant. Total stock-based
compensation expense recognized for the quarter ended September 30, 2006, was
$4,084.
The Company currently fully reserves all of its tax benefits. Accordingly, the
adoption of SFAS 123R, which requires the benefits of tax deduction in excess of
the compensation cost recognized for those options to be classified as financing
cash inflows rather than operating cash inflows, on a prospective basis, will
have no current impact on the Company.
SFAS 123 as amended by SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure" requires disclosure of the effect on net income and
earnings per share had stock-based compensation cost been recognized based upon
the fair value on the grant date of stock options for the comparable prior year
period. The Company had no options outstanding during the quarter ended
September 30, 2005. Disclosures for the quarter ended September 30, 2006, are
not presented as the amounts are recognized in the consolidated financial
statements.
The fair value of each option on the date of grant is estimated using the Black
Scholes option valuation model. The following weighted-average assumptions were
used for options granted during the quarter ended September 30, 2006:
Expected term 2-3 years
Expected volatility 146.12%
Expected dividend yield 0%
Risk-free interest rate 4.75%
Expected annual forfeiture rate 0%
13
NOTE 6--CONVERTIBLE PROMISSORY NOTE
-----------------------------------
Activity in convertible promissory notes for the nine months ended September 30,
2006 is as follows:
Accrued
Principal Interest
Balance, January 1, 2006 $ 4,530,309 $ 68,244
Loan proceeds 448,600 -
Accrued interest - 417,407
Converted to common stock (4,530,309) (475,972)
--------------- -------------
Balance, September 30, 2006 $ 448,600 $ 9,679
=============== =============
At the end of September 2006, the Company issued 12,400,000 shares of its common
stock for convertible debentures in the principal amount of $4,530,309 plus
accrued interest of $475,972.
During the three months ended June 30, 2006, the Company issued a 12%, one-year
convertible promissory note payable for $500,000 and received advances on this
loan in the amount of $448,600. The note is convertible into restricted common
shares at the rate of $1.00 per share. Management has determined that this note
qualifies as conventional convertible debt pursuant to APB No. 14, "Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants" and EITF
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios" and accordingly the embedded
conversion option is not a derivative. The Company computed a beneficial
conversion value of $358,880 based on the quoted stock price on the grant date
of $1.80 per share. The $358,880 was credited to additional paid-in capital and
charged to interest expense when the agreement commenced since the convertible
promissory note can be converted upon issuance.
NOTE 7--COMMITMENTS AND CONTINGENCIES
-------------------------------------
The Company, which has been in the development stage since its inception, May
15, 2001, did not establish sources of revenue sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$15,054,021 from inception through December 31, 2003. As a result of the
continuing losses, on August 26, 2003, the Board of Directors of the Company
unanimously approved a plan to immediately discontinue its racing operation.
This discontinued operation had a loss of $28,960 and $671,289 during the years
ended December 31, 2005 and 2004, respectively. While the Company does not
expect any additional liability, the Company had agreements in place for racing
car design and construction, team sales brokerage and broadcasting which have
not been formally terminated.
14
NOTE 8--RELATED PARTIES
-----------------------
During 2005, Godley Morris Group, LLC ("GMG"), a company 50% owned and managed
by the Company's former CEO notified the Company they were claiming
reimbursement for $291,913 for expenditures they claimed to have made on behalf
of the Company. The Company recorded this amount in due to related party in
December 2005. Effective August 29, 2006, the Company issued 65,000 shares of
its common stock to the former CEO in full satisfaction of all amounts due the
former CEO, including this claim. The Company also transferred its stock in IMGI
to the former CEO, which had no assets and net liabilities of $295,840.
At this time, the Company's current CEO is providing office space for the
Company at no charge.
The Company's former CEO was paid consulting fees of $3,500 and payroll of
$7,000 during the nine months ended September 30, 2006. The Company's current
CEO received a consulting fee of $1,000 during the nine months ended September
30, 2006.
NOTE 9--AMENDED FORM 10-QSB
The Company determined that it did not issue 950,000 shares which were a part of
the conversion of the convertible notes and related accrued interest on
September 30, 2006. The Company issued 11,450,000 shares at that time and should
have issued 12,400,000 shares. The effect on the September 30, 2006, financial
statements was to increase common stock $95 and reduce additional paid-in
capital by $95. In addition, the number of share outstanding at September 30,
2006, increased to 16,380,788.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We had been in the development stage for our planned racing operation since our
inception, May 15, 2001, and did not establish sources of revenue sufficient to
fund the development of business and pay operating expenses, resulting in a net
loss of $15,054,021 from inception through December 31, 2003. On August 26,
2003, our Board of Directors unanimously approved a plan to immediately
discontinue the racing operation. Since August 26, 2003 and until September 9,
2004, we attempted to find a suitable acquisition candidate. On September 9,
2004, with the acquisition of IMGI, we ceased one development stage and
commenced a new development stage operation.
ELECTROLYTE STRIP
-----------------
On April 19, 2005, the Company entered into a joint development agreement with
InnoZen to jointly develop a film strip product containing electrolytes to
replenish the body while under physical stress (the "electrolyte strip").
InnoZen had experience in the formulation, development, manufacturing and sale
of edible thin strips containing drug active ingredients. The Company has the
ability to assist in obtaining endorsements for the electrolyte strips by
well-known athletes and coaches. The Company contributed $115,500 in cash and
1,250 shares of its common stock, valued at $19,191 using the Black-Scholes
valuation model, for its 50% interest in the joint venture.
As of September 30, 2005, the joint venture had completed a product formulation
of an acceptable thin film prototype containing electrolytes and had completed
laboratory stability testing for the oral dosage product. The joint venture
produced initial electrolyte strips capable of holding a deliverable load of
electrolytes equal to approximately one fluid ounce of most recognized sports
drinks. The electrolyte strips were produced for flavor testing with initial
flavors to be lemon-lime and orange. All joint venture funds were expended by
December 31, 2005.
On March 29, 2006, the Company entered into a Unit Purchase Agreement with the
majority of the unit holders of Health Strip, a Nevada limited liability
company, to acquire 80% of Health Strip in exchange for 500,000 shares of the
Company's $.0001 par value common stock. Health Strip holds certain proprietary
technology for the formulation of a thin film electrolyte strip which is the
subject of a provisional patent filed in the U.S. Patent and Trademark office on
June 14, 2006. In addition, Health Strip has agreed with InnoZen to manufacture
and distribute the electrolyte strips through its California based manufacturing
facility. Through the use of InnoZen's patented manufacturing process the
electrolyte strips have now been produced. Product names and packaging should be
finalized by early November 2006, at which time sales should commence.
At the time it was acquired, Health Strip did not have any tangible assets or
liabilities, but it did have certain proprietary technology for the formulation
of a thin film electrolyte strip and the rights to file for a patent of this
process. Accordingly, Health Strip recorded $1,125,000 as an intangible asset
for patent technology rights, 80% of which is equal to the value of the
Company's stock issued on the date of the transaction. As stated above, we have
filed a provisional patent in the US Patent & Trademark office and have twelve
months to file a final application. We commenced amortization of the total
patent costs in July 2006 over seventeen years, the life of the expected patent.
We will periodically evaluate the unamortized balance of the patent and
technology costs and record an impairment loss if warranted.
16
IMGI
----
On September 9, 2004, we acquired all of the issued and outstanding common stock
of IMGI, a concept development company. During 2005, Godley Morris Group, LLC
("GMG"), a company 50% owned and managed by the Company's former CEO notified
the Company they were claiming reimbursement for $291,913 for expenditures they
claimed to have made on behalf of the Company. The Company recorded this amount
in due to related party in December 2005. Effective August 29, 2006, the Company
issued 65,000 shares of its common stock to the former CEO in full satisfaction
of all amounts due the former CEO, including this claim. The Company also
transferred its stock in IMGI to the former CEO, which had no assets and net
liabilities of $295,840.
POKER
-----
On June 28, 2005, we issued 19,250 shares of our common stock, which were valued
at $295,544 using the Black-Scholes valuation model, to acquire Poker, whose
principal asset is the rights to a proprietary fantasy football format, with the
working title, Vegas Roll'em(TM) Fantasy Football ("Vegas Roll'em"). Poker
recorded the investment of $295,544 as goodwill.
In January 2005, the Rules of Competition for Vegas Roll'em received a copyright
from the United States Copyright Office. This format allows live filming of the
high stakes action as it unfolds. Each player will have a roll of the dice to
determine which of his players will make up his team. According to the Fantasy
Sports Trade Association, fantasy football was played by nearly fifteen million
participants last year. This internet-based phenomenon has created a four
billion dollar industry.
While we may still pursue the project, our principal focus is on the agreement
with Health Strip. Accordingly, at December 31, 2005, we elected to impair our
investment in the goodwill associated with Poker to the $50,000 amount we have
determined to be the fair value of the investment.
COST OF OPERATIONS DURING DEVELOPMENT
THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO SEPTEMBER 30, 2005
Administrative expenses decreased $208,220 (54%) in 2006 from 2005. The majority
of the decrease is a result of a decrease of $166,015 in consulting and other
professional services, a decline in sponsorship sales expense of $101,300 and
offset by an increase in gross payroll of $31,000.
During 2005 we recognized a loss of $25,000 as our share of the loss incurred by
the joint venture with InnoZen. All funds were expended by December 31, 2005,
and we have not incurred any additional cost.
Interest expense increased $39,622 (38%) in 2006 as compared to 2005. The
principal balance of the debt was $3,443,537 at September 30, 2005, as compared
to $4,978,909 at September 30, 2006, immediately prior to the conversion of
$4,530,309 in debt to equity, an increase of 45%.
Net loss from continuing operations decreased from $513,158 in 2005 to $296,071
in 2006 as a result of the above factors.
17
NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO SEPTEMBER 30, 2005
Administrative expense decreased $302,632 (44%) in 2006 as compared to 2005. The
decline is partially a result of shutting down the IMGI operation in Lake City,
South Carolina at June 30, 2005. This reduced direct quarterly operating
expenses by over $50,000. We were substantially inactive in the first quarter of
2006, and have since hired three employees/consultants in April and May 2006 to
oversee the electrolyte strip development. Legal, professional and consulting
fees declined $102,940, sponsorship sales expense declined $101,300, gross
payroll declined $23,880 and travel and entertainment expense declined $29,138,
accounting for the majority of the decline in administrative expense.
As noted above, we recognized a $75,000 loss on our joint venture with InnoZen
in 2005.
Interest expense increased $480,382 (162%) in 2006 as compared to 2005 as a
result of the increase in the principal balance of the debt noted above and in
addition, the 2006 amount includes the beneficial conversion feature associated
with the new convertible promissory note issued in 2006 in the amount of
$358,880.
Net loss from continuing operations increased $78,788 (7%) in 2006 as compared
to 2005 primarily as a result of the factors discussed above.
GOING CONCERN FACTORS--LIQUIDITY
We have not established any sources of revenue to fund the development of
business, projected operating expenses and commitments for fiscal year 2006.
Since August 26, 2003, when we discontinued our plans to begin a racing league,
we attempted to locate and negotiate with a business entity for a merger with
that target business. As discussed in the notes to the financial statements, we
acquired new development stage businesses commencing on September 9, 2004. Since
September 9, 2004, we incurred losses in the amount of $2,222,081 through
December 31, 2005 and $1,145,307 during the nine months ended September 30,
2006. Management believes the electrolyte strip product will be a business
capable of generating revenues sufficient to fund projected operating expenses
and commitments. We currently plan to borrow additional funds and also to sell
our common stock in private placement transactions to raise the additional
capital required to complete our business plan. However, there can be no
assurance that the planned loans and sales of common stock will provide
sufficient funding to develop our current business plan.
During the quarter ended September 30, 2006, we issued 15,223,500 shares of our
common stock in exchange for convertible debentures, accounts payable and
accrued expenses in the amount of $5,463,628 and services in the amount of
$58,500. As a result, our current assets exceed our current liabilities by
$91,799 at September 30, 2006. It is our intention to convert our remaining
convertible debenture into common stock during the fourth quarter of 2006.
However, there can be no assurance that this will be accomplished.
These conditions raise substantial doubt about our ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
18
DISCONTINUED OPERATIONS
We had been in the development stage for our planned racing operation since our
inception, May 15, 2001, and we did not establish sources of revenue sufficient
to fund the development of business and pay operating expenses, resulting in a
net loss of $15,054,021 from inception through December 31, 2003. As a result of
the continuing losses, on August 26, 2003, our Board of Directors unanimously
approved a plan to immediately discontinue our racing operation. This
discontinued operation had a loss of $28,960 and $671,289 during the year ended
December 31, 2005 and 2004, respectively. While we do not expect any additional
liability, we were a party to a racing car design and construction agreement, a
team sales brokerage agreement and a broadcasting agreement which have not been
formally cancelled.
In March 2005, the Company and all other parties to the litigation, which
initiated in February 2004, agreed to dismiss with prejudice all claims and
counterclaims. As a result, the Company was relieved of previously recorded
liabilities in the amount of $281,181. The Company recorded $210,939 in
additional legal fees, which resulted in a net gain from discontinued operations
of $70,242 during the three months ended March 31, 2005. The Company recorded
additional legal fees of $99,202 during the September 2005 quarter which
resulted in a loss from discontinued operations of $99,202 and $28,960 for the
three and nine months ended September 30, 2005, respectively.
19
ITEM 3: CONTROLS AND PROCEDURES
A third-party consultant has been retained to communicate to management the
disclosures required by reports that are filed under the Exchange Act.
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
reports that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
the reports that are filed under the Exchange Act is accumulated and
communicated to management, including the principal executive officer, as
appropriate to allow timely decisions regarding required disclosure. Under
the supervision of and with the participation of management, including the
principal executive officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures as of
September 30, 2006, and, based on its evaluation, our principal executive
officer has concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the
date of the evaluation described above, including any corrective actions
with regard to significant deficiencies and material weaknesses.
20
PART II--OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2006, we issued 12,400,000 shares of
our common stock in exchange for convertible debentures and accrued interest in
the amount of $5,006,281, 2,713,500 shares for accounts payable and accrued
expenses in the amount of $161,507, 65,000 shares to a former CEO for accounts
payable in the amount of $295,840 and the stock of IMGI, and 45,000 shares for
consulting services valued at $58,500.
All of the shares issued were sold pursuant to an exemption from registration
under Section 4(2) promulgated under the Securities Act of 1933, as amended.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 11, 2006, pursuant to a Consent to Action in Lieu of Annual Meeting
of the Shareholders of Healthsport, Inc., the majority shareholders of the
Corporation elected a new Board of Directors to replace the then current Board
of Directors. The new directors of the Company are Hank Durschlag, Ross Silvey
and Jason Freeman.
ITEM 5: OTHER MATTERS
Ross Silvey was elected to replace Terry Washburn as Chief Executive Officer and
Chief Financial Officer on September 7, 2006.
ITEM 6: EXHIBITS
(a) Exhibits--
Exhibit 31.1 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
21
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHSPORT, INC.
December 18, 2006 By: /s/ Ross E. Silvey
---------------------------------------
Ross E. Silvey, Chief Executive Officer
and principal financial and accounting
officer